美國醫院公司 (HCA) 2015 Q4 法說會逐字稿

Good day, and welcome to the HCA fourth-quarter 2015 earnings conference call.

(Operator Instructions)

Today's conference is being recorded.

I would like to know Senior Vice President, Mr. Vic Campbell.

Please go ahead, sir.

Thank you and good morning everyone.

Mark Kimbrough, our Chief Investor Relations Officer, and I would both like to welcome everyone on today's call and to those of you who are listening on our webcast.

With me here this morning, Chairman and CEO, Milton Johnson; Sam Hazen, Chief Operating Officer; and Bill Rutherford, Chief Financial Officer.

Before I turn the call over to Milton let me remind everyone that should today's call contain any forward-looking statements, they are based on management's current expectations.

Numerous risks uncertainties and other factors may cause actual results to differ materially from those that might be expressed today.

Many of these factors are listed in today's press release and are included in our various as SEC filings.

Several of the factors that will determine the company's future results are beyond the ability of the Company to control or predict.

In light of the significant uncertainties inherent in any forward-looking statements, you should not place undue reliance on these statements.

The company undertakes no obligation to revise or update any forward-looking statements whether as a result of new information or future events.

On this mornings' call we may reference measures such as adjusted EBITDA and net income attributable to HCA Holdings, Inc.

excluding losses, gains on sales of facilities, losses on retirement of debt and legal claims costs which are non-GAAP financial measures.

A table providing supplemental information on adjusted EBITDA and reconciling to net income attributable to HCA Holdings, Inc.

to adjusted EBITDA is included in the Company's fourth-quarter earnings release.

This morning's is call is being recorded and a replay will be available later today.

With our let me turn the call over to Milton.

Thank you, Vic, and good morning to everyone joining us on the call and webcast.

This morning we issued our full earnings release for the fourth quarter of 2015.

The release is consistent with the preview of the fourth quarter we issued earlier this month.

I will make a few comments on the quarter and the strategy and then I will turn the call over to Bill and Sam to provide more detail on the quarter health reform and 2016 expectations.

We were extremely pleased with results of the fourth quarter.

Adjusted EBITDA for the fourth quarter totaled $2.131 billion, for the year $7.915 billion.

There was -- it was a record earnings quarter for HCA and also a record earnings year.

The fourth-quarter performance were the results of solid volume growth, improved payer-mix and service-mix and effective cost management.

We believe the company is well-positioned for continued success.

There are many aspects of the company that contributed to our consistency of growth and financial performance.

Our growth strategy built upon our investments in developing health systems in large fast-growing urban markets, has been delivering strong top line growth.

The consistency and effectiveness of our growth strategy, we have reported same facility admissions and adjusted-admissions growth for eight consecutive years, ER visit growth for nine consecutive years, and surgical growth for seven consecutive quarters.

We believe our strategies are well resourced and we expect to see another year of volume growth in 2016.

A consistent execution of our growth strategy, consistent growth in adjusted EBITDA, which has grown from $5.9 billion in 2010 to $7.9 billion in 2015, has resulted in strong cash flows.

Since our IPO in early 2011, we have maintained a well-balanced, shareholder friendly approach to capital allocation.

For example, since the IPO in 2011 through the fourth quarter of 2015, we had generated $20.1 billion of cash flow from operating activities.

Over the same period, we invested $9.7 billion in our markets through capital expenditures or about 48% cash generated and returned cash to shareholders, either in special dividends or by share repurchase in the amount of $9.3 billion or about 46% of cash generated.

The company had approximately $2.6 billion remaining under its 3 billion shares repurchase authorization at year-end.

We generated $4.73 billion cash flows from operating activities in 2015, up 6.4% over 2014.

We continue to have a balanced approach to capital allocations in 2015, deploying approximately $2.4 billion in capital spending and approximately $2.4 billion in share repurchases.

In 2015, we repurchased approximately 32 million shares of our stock.

In addition to our financial performance, I was pleased with our progress with respect to our clinical agenda.

In 2015, 106 or 78% of our eligible hospitals were recognized as top performers by the joint commission, compared to approximately 31% of hospitals nationwide.

The joint commissions top performance is the highest recognition for achieving excellence in evidence-based care processes for certain medical conditions.

In 2016 we will continue to leverage clinical technology especially in concepts in with big data, data analytics and clinical informatics to deliver safe, top quality and compassionate care for our patients.

We will also continue our focus on global managed development of service lines directed at expanding our clinical depth and capabilities.

We will remain committed to continuous improvement in the quality of care and service as we strategically position the company to deliver value for all of our stakeholders.

I will close my comments with my thoughts on our 2016 guidance that is included in our release this morning.

With respect to adjusted EBITDA growth, our guidance yields a 3% growth rate at the low point of the range of just under 7% at the high point.

Our guidance reflects continued solid volume growth, reasonable pricing and well managed expense growth, with little less contribution from reform in the past two few years.

We transition into 2016 with momentum and we believe the company is well-positioned to achieve its goals for 2016.

Let me turn the call over to Bill to provide additional detail on the quarter, health reform, and 2016 guidance.

Thank you, Milton, and good morning everyone.

I will cover some additional information relating to the fourth-quarter results and review our 2016 guidance, and then I will turn the call over Sam for an update on our operations.

As Milton commented we were extremely pleased with the quarter's results and the quarter finished a very strong 2015 for the company.

Fourth quarter was coupled with a good payer-mix and service-mix and solid expense management, which combined to drive the quarter and the year's strong performance.

For the quarter, adjusted EBITDA increased 8.9% to $2.131 billion from $1.956 billion last year.

We reported an improvement of 50 basis points in adjusted EBITDA margin in the quarter to 20.8%.

As a reminder, in last year's fourth quarter we recorded a $68 million increase to Medicaid revenues related to the Texas Medicaid waiver program, reversing a reduction we had made in the third quarter of last year.

Adjusting for the impact of this item, as well as the decline of $27 million in [EHR] income and an increase of $24 million in share-based compensation, adjusted EBITDA grew 15.4% over the fourth quarter of last year.

Now let me speak to volumes.

In the fourth quarter our same facility admissions increased 1.6% over the prior year and equivalent admissions increased 2.9%.

Sam will provide more commentary on our volumes earnings in a moment.

During the fourth quarter, same facility Medicare admissions and equivalent admissions increased 0.6% and 1.8% respectively.

This included both traditional and managed Medicare.

Managed Medicare admissions increased 6.3% on a same facility basis and represent 32.8% of our total Medicare admissions.

Same facility Medicaid admissions and equivalent admissions increased 3% and 4.8% respectively in the quarter, consistent with trends we experienced in the third quarter.

Same facility, self-pay and charity admissions increased 8.6% in the quarter, representing 7.7% of our total admissions compared with 7.2% last year.

Managed care (inaudible), which includes exchange admissions, increase 0.6% and equivalent admissions increased 1.9% on a same facility basis in the fourth quarter compared to the prior year.

Same facility emergency room visits increased 3.6% in the fourth quarter compared to the prior year, and same facility, self-pay and charity ER visits represented 19.6% of our total ER visits in the quarter, which is consistent with last year.

Intensity of service or acuity continue to increase in the quarter with our same facility case mix increasing 2.1% compared to the prior year period.

Same facility surgical volumes increased 1.9% in the quarter, the same facility inpatient surgeries increasing 1.5% and outpatient surgeries increasing 2.2% from the prior year.

Same facility revenue per equivalent admission increased 2.6% in the quarter.

Same facility managed care and other, including exchange revenue per equivalent admission, increased 5.6% in the quarter, generally consistent with our third-quarter results.

Same facility managed care and other, including exchange case-mix increased 2.4% compared to the prior year.

Same facility charity care and uninsured discounts increased $494 million in the quarter compared to the prior year.

Same facility charity care discounts totaled $958 million in the quarter for an increase of $46 million from the prior-year period, while same facility uninsured discounts totaled $2.873 billion, an increase of $448 million over the prior year period.

Now turning to expenses; expense management in the quarter was good, as we were able to leverage strong volumes and higher intensity (inaudible).

We also saw improvement from our Q3 expense levels as a result of various management actions we began last quarter.

Same facility operating expense per equivalent admission increased 1.2% compared to the last year's fourth quarter and sequentially, operating expense for equivalent admissions declined 0.3% from the third quarter of 2015.

Salaries and benefits as a percentage of revenue increased 50 basis points to 44.9% compared to 44.4% in last year's fourth quarter.

Sequentially salaries and benefits, as a percentage of revenue, improved 200 basis points from the 46.9% we reported in Q3 of 2015.

Same facility supply expense for equivalent admissions declined 2.1% for the fourth quarter compared to the prior year period and improved 80 basis points as a percentage of revenue from last year's fourth quarter, reflecting continued success on several supply chain initiatives.

Our pharmacy costs trends moderated slightly in the quarter.

Our total pharmacy costs were up approximately 9% in Q4 compared to the 13% increase we reported in Q3 of 2015.

Other operating expenses improved 50 basis points from last year's fourth quarter to 18.0% of revenues.

We recognize $1 million in electronic health record income in the quarter compared to $28 million last year, and this was consistent with our expectations.

As previously mentioned our adjusted EBITDA margins for the quarter increased 50 basis points over the prior year period, but adjusting for the $68 million Texas waiver item in 2014 and the changes in EHR income and share-based compensation, adjusted EBITDA margin increased 150 basis points for the quarter over the prior year period.

Let me briefly touch on health reform activity in the quarter.

In the fourth quarter of 2015 we saw 11,238 same facility exchange admissions as compared to the 7700 we saw in the fourth quarter of last year, in comparable to the 11,445 exchange admissions we reported in the third quarter of 2015.

We saw just under 38,000 same facility exchange ER visits in the fourth quarter compared to 25,600 in the fourth quarter of [2015] and the 40,200 we reported in the third quarter of 2015.

When we roll all the components of health reform that we contract, we currently estimate health reform contributed just under 6% of adjusted EBITDA for the full-year of 2015, and that was in line with our expectations.

So all in all, a strong quarter has finished a very strong year for the company.

Let me touch briefly on cash flow.

Our cash flow remains very strong and fourth-quarter cash flow from operations was $1.558 billion compared with the $1.627 billion last year, just primarily a result of changes in working capital offset an increase in net income.

For the full-year 2015, cash flow from operations was $4.734 billion up from $4.448 billion last year and free cash flow for 2015 was just over $1.864 billion.

At the end of the quarter we had approximately $2.179 billion available under our revolving credit facilities.

So now let me move into a discussion about our 2016 guidance.

Highlighted in our earnings release this morning we estimate our 2016 consolidated revenues should range from $41.5 billion to $42.5 billion.

We expect adjusted EBITDA to be between $8.15 billion and $8.45 billion.

Within our revenue estimates, we estimate the equivalent admission growth range between 2.5 and 4% for the year and revenue per equivalent admission growth range between 2% to 3% for 2016.

We anticipate our Medicare revenues for equivalent admission to reflect the composite growth rate of approximately 1% to 2%, factoring in market basket changes and market reductions as well as some anticipated intensity increases.

Medicaid revenues for equivalent admission are estimated to be mostly flat year-over-year excluding any changes in the Texas waiver revenues.

And managed and commercial revenues per equivalent admission are estimated to grow between 4% and 5%.

We expect a continued step down of our EHR incentive income of about $[40] million.

EHR related costs are no longer being considered incremental expenses but do remain in the system to support EHR and other automation efforts.

We also anticipate a growth in share-based compensation of approximately $40 million.

So we anticipate operating expense for adjusted admission growth of approximately 2.5%.

Our guidance includes the estimated net impact of health reform.

While we expect exchange volumes to continue to grow in the third year of health reform, isolating the net EBITDA impact of health reform, the core operation is becoming more [suggested] and increasingly difficult.

We will continue to report on exchange volumes which we can identify, but converting these variables to a EBITDA impact has increasing imprecision.

We believe reform will continue to contribute to the growth of the company and a reasonable estimate today is reform will contribute approximately 1% of growth for the company in 2016.

Relative to other aspects of our guidance, we anticipate capital spending to increase to $2.7 billion in 2016, which is in line with our three-year capital plan that we announced early in 2015.

We estimate depreciation and amortization to be approximately $1.9 billion and interest expense to be approximately $1.75 billion.

Our effective tax rate is expected to be approximately 38%.

And lastly, our average diluted shares are projected to be approximately 404 million shares for the year and earnings per diluted share guidance were 2016 is between $6 and $6.45.

So that concludes my remarks and I will turn the call over to Sam for some additional comments.

Good morning.

As mentioned earlier the fourth quarter was another solid quarter for volume growth across the company and capped off a very strong year of growth for HCA.

Again this quarter, we had broad-based growth across our divisions and we had broad-based growth across the various service lines that make up our business.

To put a finer point on the consistency Milton highlighted, HCA has now grown its admissions and emergency room visits on a same facility basis in 18 out of the last 20 quarters.

This consistency is not only seen in these growth metrics, but also in many other areas of our business.

For the fourth quarter, the company had very low flu volumes which reduced our growth in admissions by approximately 0.7% and also reduced our growth in emergency room visits by almost 2%.

Ten of 14 divisions had growth in admissions and emergency room visits in the quarter.

For the year, all divisions had growth in both of these categories.

13 of 14 divisions had growth in adjusted admissions for the quarter.

For the year, all divisions had growth in adjusted admissions and within the divisions 86% of all HCA domestic hospitals had growth in adjusted admissions.

This broad-based performance reflects HCA's strong and diversified portfolio of networks and 42 domestic markets, most of which we believe still have good growth prospects.

In addition to the strong portfolio performance the company's growth across its diversified facilities and service lines with equally strong.

On a same facility basis, inpatient surgeries grew by 1.5% in the quarter and 2.1% for the year.

Surgical admits grew by 80 basis points to 28.4% of total admits in the quarter and for the year surgical admits were slightly up over the prior year at 27.5%.

Outpatient surgeries grew by 2.2% in the quarter and 1.6% for the year, both components of this service line, hospital-based and our freestanding ambulatory surgery center divisions showed solid growth.

Behavior health admissions grew by 7.9% in the quarter and 8.4% for the year.

Rehab admissions grew by 6.4% in the quarter and 8.5% for the year.

Deliveries were the only volume metric down for the quarter.

It was down 1.8%, however, managed care deliveries were actually up.

For the year deliveries were up 0.8%.

Average length of stay increased 1.1% of the quarter and 1.3% for the year.

These increases are mostly a result of the company's growth agenda, which includes developing a more comprehensive and complex level of services across our provider networks.

For example, trauma volumes across our growing network of trauma centers were up 27% for the year and cardiovascular surgery volumes were up over 6% for the year, which is a result of adding deeper more complex capabilities to our existing program.

And finally, the company's been investing aggressively to expand its urgent care centers.

These centers improve convenience for a patients and increase access to our networks.

This past year we had over 1 million urgent care visits, a 500% increase.

Our urgent care centers, coupled with a 3.3% growth in a number of physicians who have joined our medical staff, are making it easier for our patients to use an HCA network and improving our overall outreach efforts.

As we move into 2016, we think HCA's is well positioned to succeed.

We believe macros for our markets are still positive and we believe the company is heading into the year with momentum.

Demand growth in our markets is strong.

We estimated at approximately 2% per year, driven primarily by population growth and positive economic trends.

The pricing environment is stable and we have good visibility into our contracts.

The company has contracted for 85% of his commercial revenues in 2016, over 50% for 2017 and around 20% for 2018, at pricing terms that are consistent with the past few years.

Market share is at an all-time high.

The opportunity still exists to increase it as we execute our growth agenda and increase our capital spending.

Over the next two years, we will add close to 1000 inpatient beds and 400 ER beds to address capacity constraints and growth opportunities.

The competitive landscape in HCA's markets is mostly unchanged.

Complementary in market acquisitions are available, especially in the outpatient areas.

We had next generation growth opportunities for many facilities within our portfolio.

This past year 80% of our hospitals had earnings growth.

And lastly we have a solid handle on cost trends, which we believe should be manageable in 2016.

In summary, we believe the company has the right strategy and the right approach to the market for sustaining growth.

We believe the company is resourcing is growth agenda appropriately and we are improving our ability to execute even better by investing in systems and specialization across the company.

With that, let me turn the call back to Vic.

All right, thank you guys.

Audrey, if you come back on and pull for questions.

We would like to keep the questions to one at a time so everyone gets a chance.

Thank you.

(Operator Instructions)

We will go first to A.J. Rice with UBS.

Thanks; hello, everybody.

So I'm just thinking about the EBITDA growth target for 2016.

You've got a 3% to 7% at the high and low end of the range, or low and high end of the range.

I think Bill made the comment that a percent of that is probably attributable to incremental reform benefit.

And you also mentioned high tech in the stock-based comp.

I guess they are about a $40 million each headwind, so they are about 1%.

They eat up that reform benefit.

So the 3% to 7% -- is it right to think about that going forward as the parameters around your organic growth?

Can you give us some flavor for how you think about that?

A.J., thanks you very much.

Bill, do you want to --

Absolutely.

So, you know A.J., as you know back in 2011, shortly after the IPO, we started getting long-term growth expectations for HCA, based on the conditions of the market -- economic conditions and the like -- and we peg that at about 3% to 5%.

So as we look now at the market -- the improvement and economic conditions and the like -- we feel a little bit better about our growth prospects.

Obviously we've had a good run here, especially over the past two years -- really over the last five years, but especially the past two years.

I feel like now we're more in the 4% to 6% outlook.

But again, our caution to give long-term outlook in our industry right now -- again some of the changes and developments -- but we see at a little more favorably than we did, say, four years ago.

And so, obviously, this year we feel good about our guidance in that 3% to 7% range, but on a long-term basis, I would probably take it now at 4% to 6%.

Thanks.

We will move next to Andrew Schenker at Morgan Stanley.

Good morning.

I just wanted to discuss a little bit more about the utilization trends.

You obviously gave quite a bit of color about the economy, et cetera.

Even as 2015 progressed on a two-year spec, you continue to see acceleration throughout the year and your guidance remains quite strong for next year, especially given the continued tough flu comp in 1Q.

Could you maybe just really talk about what you're doing to drive this increase and strong volume trends?

And really, how we should think about the long-term sustainability of these positive volumes?

All right, Andy.

Thank you.

Sam is going to address that.

When you think about HCA growth strategy -- we've spoken of this numerous times -- we think first and foremost we have incredible markets where we do business and those markets are yielding on a composite basis across the Company, approximately 2% increase in demand growth.

This coming from population growth as well as aging baby boomers, increasing employment, and so forth.

On top of that the Company had achieved anywhere between 25 to 45 basis points of market share gains over the past few years, and as we look forward we see those basic components being similar to what I just laid out.

And so, next year's guidance includes about 2% to 2.5% demand growth at this particular point with our estimate, and then roughly 25 to 30 basis points of market share gain.

Our approach to gaining market share is clearly built around being the provider system of choice for patients and for our physicians, and that involves four or five major dimensions that we invest in very aggressively.

We monitor very closely and those are centered around, do we have the right network of outpatient facilities and ease of access, if you will, into HCA's facilities; building out comprehensive service lines -- I mentioned that in my comments.

And then, working with our physicians very effectively to enable them to do what they need to do for our patients.

And we do that with one other dimension that we are investing an even more, and that's coordinating care across the HCA continuum and the HCA network.

And that is yielding gains for us.

Obviously, our capital spending is enhancing our growth.

We believe in putting us in a very strong competitive position within the markets.

And then finally, I think the competitive advantage that at HCA has globally across these markets, is that we have an incredible amount of best practice and solutions that we can export from one market to another and put that to use in a very timely, go-to-market-quickly kind of way, and that gives us advantage we believe on all these dimensions and globally allows us to grow our business.

Thank you, Andy.

We will take our next question from Sheryl Skolnick at Mizuho Securities, USA.

Good morning and thank you.

Listen, this is a very different tone, and congratulations on achieving a record year and record quarter.

Hard work, well rewarded.

I'm going to go back, though, and ask about the cost trends here, because this is such a substantial change from our last call.

Can you talk about some of the things -- I guess it would be mostly a question for Sam -- that you've done to address the labor issues?

Obviously, you're constantly monitoring them, but what has changed?

What has improved?

And should we now no longer be worried about nurse wage inflation and your ability to manage that cost going forward?

Thank you.

All right, Cheryl, thanks.

And Sam gets that one again.

If you look at the fourth quarter and you make one adjustment that Bill mentioned in his comments about the $68 million of waiver revenue that was misplaced from the third quarter to the fourth quarter -- that is probably not the right term; forgive me, Bill.

That reduced our SWB to basically flat with the fourth quarter of last year, so I was very pleased with that.

What we saw year over year -- and I will speak to sequential in a moment, because I think sequential performance is most important here -- year over year we had about 1% improvement in productivity.

We had a slowdown in the rate of growth in contract labor.

It did grow, but slower than what it had grown in the previous nine months of the year.

And so those are some year-over-year metrics.

But what was really impressive and what I was pleased with our team, as I mentioned in the third quarter -- we started to see this in September -- sequentially, we improved our productivity from third quarter the fourth quarter about 1.7%.

In the previous two years we had improved our productivity from the third quarter to the fourth quarter in low tenths -- like 0.1% in one year and 0.3% in the other.

So very significant movement by our teams to make some adjustments in our productivity.

Contract labor did slow down, actually reduced by about 1% from the third quarter to the fourth quarter, so that was encouraging.

And as we mentioned in the third quarter call, we did see some stabilization, but we actually saw a bit of improvement sequentially in the fourth quarter as compared to the third.

The contract labor still remains an opportunity for the company.

Nursing contract labor is somewhere between 8.5% to 9%.

That has stabilized a little bit, but nonetheless an opportunity.

As we look at what the Company has been able to accomplish, I went back and studied: 80% of the last 20 weeks we have actually had a net gain in full-time RN positions across the Company.

We've also dropped about 900 FTEs from orientation into supporting our patients.

So I'm very pleased with the progress we are making in our hiring efforts, our 1 HR, a program is starting to get it sea legs, if you will, and really yield some benefits for the Company as we finish our rollout in 2015.

I am eagerly awaiting improvement there.

As we think about wage rates for 2016, we are anticipating a little bit of acceleration, but something that is very manageable, we believe within our overall budget.

And so that is the story on our labor for the fourth quarter.

Great.

Just a quick follow-up.

Last quarter and third quarter we called out nursing turnover rates again, the cause and effect of the contract labor increases.

And you know we haven't solved the turnover issue in a quarter.

We said that last quarter.

And that's an opportunity for the Company in 2016 to improve on that, and we have several initiatives that we will kick off to try to improve turnover in nursing.

And in response, we should see a corresponding improvement in contract labor cost moving forward as well.

So again, just to make it clear, we haven't solved the turnover issue.

We're working on it and I expect to see improvement throughout 2016 and again, view it as an opportunity for the Company.

Thank you.

Thank you, Sheryl.

Great, thanks.

We'll move next to Kevin Fischbeck at Bank of America.

Great, thanks.

Last quarter you mentioned something about payer mix and what you saw in Q4 versus what you saw in Q3.

Specifically, you mentioned Medicaid authorizations slowing down in Texas and Kansas.

Did that come through and help the quarter?

Or is that still a drag?

I guess, what is your assumption about payer mix going into 2016?

All right, Kevin thank you.

Bill is gong to take that one.

Hey Kevin, this is Bill.

I'll start and give you some color and share if Sam wants to add in to this.

You're right, our uninsured admissions we called out in the third quarter.

If you recall, we saw over a 13% growth in uninsured admissions in the third quarter.

That dropped in the fourth quarter to just under 9%, at 8.9% in the fourth quarter.

As we mentioned in our calls in the past, there has been some noise when we do year-over-year comparisons, mainly because of the first year of health reform and Medicaid conversions.

We did, as you mentioned, identify some processing issues in the third quarter of Medicaid applications in Texas and Kansas.

We did see some improvements there; didn't necessarily have a material effect on us in the quarter.

Just as a reference, that uninsured admission growth of 8.9% represents roughly 2,800 admissions and in the third quarter it was roughly 4,400 admissions.

So sequentially, we saw some improvement in there.

Going forward, I would anticipate that our uninsured volume growth will track our uninsured [BD] volume growth.

Right now, I believe, absent any change catalyst such as a new state expanding or some other macro trends, I'd anticipate our uninsured volume trends to settle out in the high single digits.

And that's what we have baked into our guidance going forward.

Sam, do you have any other mix comments?

No, that's good.

Kevin, thank you.

Thanks, Bill.

Jason Blackman.

Hey, guys.

Just a question -- in your guidance have you made any assumptions for benefits from the Louisiana Medicaid expansion?

(multiple speakers) It is so immaterial in the overall scheme of things.

We have four facilities in Louisiana, and they are not really material with respect to the Company's overall position.

It doesn't have any significant impact at all on HCA.

Obviously, it will benefit our Louisiana hospital, but it is not going to be material.

Thank you.

We will go next to Scott Fidel at Credit Suisse.

Thanks.

I had a question about the rising case mix; and maybe if you could give some more details on what you think the drivers of that are?

I'm interested if you're seeing that case mix being moved higher by the exchange volumes?

Or if there's other factors that are driving that?

All right.

Sam you want to take it?

All right.

The short answer on the exchange volume is, no.

It's not big enough in the overall scheme of our volume to drive the Company's composite case mix.

With respect to case mix -- again, I will refer you back to my comments -- the Company is very intentional about trying to drive more complex, high acuity-type services to our facilities.

Our strategy, our core strategy, within our individual markets is to be able to offer somewhere in the HCA system all services to a patient.

So for example, if we need a transplant, we want to have capabilities at one particular facility where we can offer those kind of things.

So over the last four or five years we have added a significant number of services to our facilities and to our markets that have increased our case mix and increase the overall acuity and built out the capabilities of our provider system.

This past year we opened up three new burn centers, as an example.

We've opened up 10 to 12 new trauma centers.

We have expanded our cardiovascular services where we now have 14 to 16 TAVR programs, which is a very sophisticated procedure for valve surgery.

Those kind of developments are ongoing within the Company as part of our core strategy to be able to provide all services, a comprehensive array of services, to our system and to any patient that hits the HCA network.

And a little more on that: what Sam described -- these services, be it burns or trauma -- typically lead to more surgical procedures in the facility.

And as I mentioned in my comments, we have reported seven consecutive quarters of surgical growth.

And so as we grow our surgeries, obviously we are growing our case mix and that's showing up in our numbers.

Thank you.

Thank you, Scott.

Will go next to Whit Mayo at Robert Baird.

Okay, thanks.

Just curious, are you guys expecting any changes with Texas [EPL] or Florida -- any supplemental payment changes for 2016 that we need to be aware of?

Bill will take that.

Hey, Whit, this is Bill.

Right now, no.

Our Texas waiver program and our guidance anticipates, and we're optimistic that the state and CMS will yield some continuation of the program in the fourth quarter.

And so we're not anticipating material changes to that going forward; nor are we in Florida program right now, as well.

So our 2016 guidance, for at least the revenue side, is fairly consistent with what our 2015 results are.

Thanks, Whit.

We will go next to Sarah James at Wedbush Securities.

Thank you.

Guidance looks like it implies about 4.6% to 7% growth in revenue versus the 3% to 7% EBITDA that you talked about.

If I look at the range of revenue and adjusted EBITDA guidance, it looks like at the low end it was accounting for up to 30 basis points of a decline.

Is that just conservatism?

And if not, could you walk us through some of the major pieces that you see going on there?

Bill.

I'll try to cover that.

I think I get the gist of it.

You are looking at the low end of our guidance.

As Milton said in our comments earlier, the midpoint of our guidance represented as reported about a 5% growth over our 2015 levels.

When you adjust for the high tech and share-based comp the midpoint is roughly 6%, which is one of the higher levels that we have guided going forward.

On the low end, that would change it from 3% to 4%, but it gets us in that range of 4% to 6% when you factor those items -- again, as Milton mentioned in his comments in response to an earlier question.

I think from a guidance perspective, compared to historically where we've guided, we feel comfortable with where we stand right now.

Got it.

So on the core business, with everything you're doing with expense control for contract labor and drug costs, you see at least maintenance of margins, if not an improvement [quick]?

Yes.

I think that's correct.

That's what were looking for, and as we've said, when we get on the high end of that range we expect some margin expansion.

In the middle point it's in the margin maintenance mode.

Thank you, Sarah.

Thank you.

We'll take our next question from Ralph Giacobbe at Citigroup.

Thanks, good morning.

I just wanted go back to the cost lines.

Again, SWB certainly improved, but it looks like really strong performance on supplies with a down on adjusted admission basis.

Yet, you talked about higher acuity and good surgery numbers.

Can you maybe talk about the improvement there?

And sustainability of that into 2016?

Thanks.

I think it is important to understand that last year in the fourth quarter our supply costs were uniquely high, and actually increased quite a bit more than we had anticipated.

I don't know all the specific reasons without looking at the metrics, though we did jump off sequentially from the third to fourth quarter quite significantly.

And in 2013 we also jumped up, but not nearly as much.

This year we jumped up from the third quarter to the fourth quarter on a per unit basis, but not nearly as much as the fourth quarter last year.

So the comp was, I will say favorable, if you will, to some degree.

We obviously have a very robust supply chain program.

We did see some moderation, as Bill mentioned, in pharmaceutical costs and I think that the net of all that yielded pretty much of a supply cost metric about where we thought it was going to be inside of our own plan.

So there is nothing really other than a difficult comp that I think speaks to supply.

I was going to talk about supplies in the longer-term and talk about what we have.

HPG, our GPO, helped with group purchases and continues to grow.

Tenet Healthcare will join HPG in February, here, in just a few days.

And that should give us some opportunities with respect to pricing improvement, just off our base pricing and through HPG contract.

So on a long-term basis, I think, again, we also have upside just from how we are negotiating our contracts and pricing through the GPO, which will drive benefits not only for HCA but really all of our members within HPG over the longer term and over the next 6 to 12 to 18 months.

Thank.

Thanks.

We will go next to Gary Lieberman at Wells Fargo.

Good morning; thanks for taking the question.

Can you talk about your growth in urgent care and how it fits in with the inpatient strategy?

And if you are starting to see any over-saturation in any markets from urgent care?

Sam?

We have 66 urgent care centers inside of HCA, most of which have come in the form of acquisitions -- the acquisition we did in Dallas and that recent acquisition that we did in Las Vegas.

We have developed urgent care centers in Kansas City and Nashville, and we have plans to expand our urgent care center platform to other markets and even within existing markets expanded.

There are a lot of urgent care centers inside of HCA's market.

But with the acquisition of Care Now, in particular, we think we acquired a best-in-class provider.

And our plan is to replicate that capability in other markets and roll out the model that they've used that is very effective for our patients and very effective for our networks.

As it relates to our networks, we do generate downstream referrals from our urgent care centers to both our physicians, who are connected to HCA system, as well as our emergency rooms and then on into the inpatient activity.

The volume of downstream referrals is not nearly as large as our freestanding emergency rooms, which produce a larger downstream flow to our hospitals.

But the components that we're trying to build here between physician clinics, urgent care centers, freestanding emergency rooms, and then hospital-based emergency rooms, is all part of having a system wide approach to creating convenience, ease of access, user-friendly solutions for our patients, and then building out the geographical footprint of the HCA network.

Gary, thank you.

We will go next to Chris Rigg at Susquehanna Financial Group.

Just wanted to ask about the trends and the bad debt expense.

It's been volatile this year and the seasonal trend from Q3 to Q4.

For the first time that trend has gone -- bad debt has gone down sequentially since 2011 -- so if you could give us some color on what you are seeing there?

And then more importantly, when we think about 2016, is $1.1 million-ish range per quarter the right level amount to think about?

All right.

Bill?

I'll take that, thanks.

As we reminded people in the past, when you look at bad debts, we think you should look in terms of our total uncompensated care, which includes bad debt, charity, and uninsured discounts.

Because in any given quarter you can have some fluctuations in there, and that is why we give the charity and uninsured discount numbers in my commentary.

When you look at uncompensated care, anticipate that to grow as a percentage of our gross revenue consistent with what our uninsured growth is.

In the fourth quarter, when I look at uncompensated care, we saw sequential improvement versus the third quarter.

And when you look at year over year, that year-over-year growth in uncompensated care is tracking our high single-digit uninsured volume growth.

So you are subject to some fluctuations in the bad debt line alone as we adjust our uninsured discount percentage.

So you look at uncompensated care in total.

But as we look at bad debts, I would think we will continue to see that inflate at our high single-digit uninsured volume growth.

Thank you, Bill.

We will move next to John Ransom at Raymond James.

Good morning.

I think your story is pretty straightforward.

My question is, is there anything that would tempt you off your current path?

You haven't really made a big acquisition in a while.

Is there anything other than a big market coming up for sale that you are now thinking about?

And secondly, are there any plans in my lifetime to provide any more color on Parallon as a separate entity?

Thank you.

(laughter)

Hey, John, how long are you going to live here.

The Parallon first -- we do not see Parallon as a separate entity and actually reform Parallon.

We really wanted it to be a subsidiary within HCA that we could grow.

And we still have that objective and Parallon is growing.

I mentioned HPG earlier -- solid growth in HPG, and I think we will continue to see that as well.

With respect to your first question, around acquisition opportunities, we have the financial flexibility as you know, and access to capital, to do more significant acquisitions.

We are very disciplined in the sort of markets and facilities that we want to invest in.

If is just a matter of owning hospitals, we could do that, but, again, they would not fit our profile or would not fit the long term growth prospects and return prospects that we're looking for.

So we have been very disciplined and we will continue to be disciplined.

That being said, we pretty much at any point in time have a pipeline of meaningful opportunities.

As I said --

You never buy anything, though.

(laughter)

I was going to say, you've heard me say many times over recent years --

Your M&A guys have to be getting bored, because they keep bringing you [gold] and you guys never buy anything.

Of course, we do a lot of big market acquisitions, but as far as the big ones you're thinking to, things like Kansas City that happened in 2003 -- those opportunities are really hard to find and they are going to come up in the not-for-profit sector.

Typically we may engage in conversation, but many times these organizations decide ultimately not to sell.

So we'll continue to be active in looking for the right opportunity.

Again, we're not building any of those into our expectations here in the short term.

But then again, if we find the right one we are prepared to move on it and we've got the balance sheet capabilities to do it, and we will continue to be active in pursuing them.

Again, if the right market present themselves.

Let me add one thing to Milton's comment about end market acquisitions.

Just over this past year, we acquired a physician network in San Jose, which significantly solidified our physician strategy in a very important and growing market to HCA.

We bought a large urgent care center inside of Las Vegas, which significantly improved our access and physician relationship and so forth in that market, which is very important to HCA.

We bought a rural hospital that was contiguous to Orlando and Jacksonville.

We were able to re-channel referrals out of that hospital into HCA system; pick up incremental market share.

So these complementary acquisitions -- on top of that we acquired five (inaudible) surgery centers this past year and added it to our network within a couple of major markets.

So these things are very strategic and create more durability, more competitiveness, and allow us to grow organically in very high-growth markets.

So those are conservative from a capital allocation standpoint, predictable from a return standpoint, and provide a lot of synergies to the organization.

And so from that standpoint, those are very important.

We don't call them out that often, but they are very important to those individual markets.

John, thank you very much.

Thank you.

We will go next to Matthew Borsch at Goldman Sachs.

Yes, good morning.

Just wondering about if you can talk about, within bad debt, the portion that relates to insured patient cost sharing.

And maybe how you saw that trend this year?

And as a percentage of the bad debt mix?

And where you think that's going?

Matt, thank you.

Bill, you want to get that?

Matt, thank you.

Historically, and pretty much consistent this year, about 30% of our bad debt is associated with the deductible and co-pay; and 70% coming from the uninsured population.

When I look at our deductible and co-pay and patient liability, really what we have seen throughout 2015, we have seen those average balances grow in that 10% to 11% level, while maybe historically they were growing in 7% to 8%.

So the average balances are growing a little bit.

Our collections are holding.

So our collections per account are holding with what are historical levels.

So it is slightly contributing to some increase in bad debts, but the majority of the bad debt is being driven by uninsured activity that we had.

All right, thanks, Bill.

Thanks, Matt.

We will go next Ana Gupte at Leerink Partners.

Thanks, good morning.

I wanted to follow up on the question about the bad debt as it relates to the health insurance exchanges.

The plans, or generally the public plans, are saying it is about 30% of their membership is special enrollment.

And generally speaking, the special enrollment people are incurring 25% to 55% higher claims costs.

I was wondering, as you saw in the third quarter, the uptick in the bad debt -- you talked about the Medicaid delays in processing; but a piece of it, I think, was exchange-related and in the fourth quarter, as these guys probably saw the deductible run through.

Do you have any idea about what their utilization patterns have been?

And if they end up being delinquent between the fourth quarter and the first quarter, if your claims adjudication has already been able to identify that?

Are you talking to, or are your claims systems on reimbursement communicating the plans to make sure that is not happening?

First, put in perspective that our exchange volume is roughly 2% of the total Company volume.

So the exchange activity by itself is relatively small, going forward on that.

So as we look at the activity within the exchanges, we did mention in the third quarter we were seeing some previous exchange volume moved to uninsured.

It was 400 admissions for HCA in the third quarter.

It was roughly the same in the fourth.

That's on 460,000 admissions for the Company.

So there is some activity in that area, but for HCA it is immaterial for us, and it is contained within the overall aspect of our bad debt, which I've talked about previously.

Bill, thanks.

We have time for just a couple more quick ones.

We will go next to Josh Raskin at Barclays.

Thanks.

Good morning.

I just wanted to follow up on the CapEx numbers.

I know you guys outlined the increase earlier this year and talking about $2.7 billion.

So just curious -- how much of that is maintenance CapEx?

And then, maybe you can give us a little bit of color on how much is being spent on traditional acute care hospital versus outpatient centers and other things?

Or maybe just more color on those expenditures?

We spend about $250 million a year in IP-related expenditures.

I'm going to lay that out there.

Then about $1 billion of our spend is what I would call routine investments.

So then you've got roughly $1 billion to $1.2 billion related to growth prospects, capacity constraints, new service line developments, outpatient facilities, and so forth.

As I mentioned in my comments, the investments that we have been making are producing about 1,000 new beds over the course of 2016 and 2017.

That is slightly up over the number of beds that we put into service in 2014 and 2015, and slightly up over 2012 and 2013.

We have number of markets that are approaching capacity, and they are very significant markets to HCA.

And a lot of this capital is going specifically to these markets that are at a certain level of capacity -- inpatient capacity, outpatient capacity, primarily in our ERs, and surgical capacity.

And so it is very well diversified, both in service line capability and also within our markets.

So it is being shared very broadly across the company.

Again we think this diversified approach to different kinds of service allocations and market allocations creates a very conservative return profile for HCA.

The more we can put it on an existing chassis, where we have physicians, we have fixed costs, we have reputation in the market, the easier it is to produce a return because were able to leverage those existing capabilities.

So that is our fundamental approach.

We do have a few markets where we are adding new facilities, like new hospitals.

They are more low start-up hospitals that are very important to a geographical presence and also to network development, but those do not add a lot of volume but they do create new relationships and over the long pull, we think they will be very significant facilities to our markets.

With our increasing capital, Sam and I and a lot of our group [presence] spend time out in the field, within our hospitals.

And from that, we see opportunities -- opportunities to invest, as Sam said, to expand services or to deal with the capacity constraints that would otherwise exist.

And it is a conservative investment strategy versus an acquisition for the reason Sam just noted.

To back up to our performance, if you look back two years ago, our return on invested capital was still 14.1%, and that's incredible number to start with.

But based on 12 months ended December 2015, our return invested capital was 15.4%.

So if we're investing more capital in our existing markets, we are seeing our return grow.

And so again, we like the strategy; that's why we expanded it over three years to $7.7 billion, up about $0.5 billion.

And again, it gives us confidence with our guidance to see these opportunities in these fast-growing markets.

All right.

Thanks, Josh.

Two more questions.

We'll go next to Gary Taylor at JPMorgan.

Hey, good morning.

The reality is, you've answered most of my questions.

All right.

Next.

Thank you.

Go ahead, and take the last one.

We will take our last question from Paula Torch at Avondale Partners.

Thanks guys and Gary for squeezing me in.

I would just end with a quick question, I think maybe on market shares.

I was wondering if you might give us a little bit of an idea of how much more room is left to gain market share in your markets?

Or how much of an uptick you think that longer term and market share?

Thanks.

Sam, do you want to take that one?

We're running [24.5]% market share across all of HCA market.

I think we 75 percentage points on the upside.

I am being facetious, Paula.

We have been on a pattern of growing, like I said, between 25 and 40 basis points a year.

My thinking is, for 2016, in particular, and I think that is a reasonable target for us.

The thing about HCA is, we compete in a very fragmented environment where the same competitor doesn't really exist from one market to the other.

So what we compete against in Miami is not necessarily the same system that we compete against in Dallas.

Nor is that the same system we compete against in Salt Lake City or even San Jose.

That fragmentation allows us to have an advantage in the market and when we can deploy capital in a very unique way or effective way, or create a service line capability or some other initiative across the HCA's markets, we are able to do that, maybe, without our competitors being able to see it like we're able to see yet because of our multi-market perspective.

So from a market share standpoint I think that is a pretty good metric for the Company, as far as the type of growth that we are thinking about.

And I do not see any reason why that is not a doable for the Company in the near term.

Thank you.

Paula, thank you.

Thank all of you and look forward to hearing from you.

Have a great day.

And that does conclude today's conference.

Again, thank you for your participation.